Year-End Tax-Planning Tips

There is not much you can do after December 31 to reduce your taxes for the previous year. We recommend that you are proactive and review your tax issues before the end of the year to see what can be done to pay the IRS only what is legally due, and not a penny more. Here are a few tax tips that may help save you some bucks.

Monitor your Adjusted Gross Income (AGI)

There are many tax deductions and credits that are phased out (you cannot deduct) when your adjusted gross income (AGI) exceeds certain limits. Some of those deductions and credits include the following:

  • The Child Tax Credit
  • The education credits (both the Hope and Lifetime credits)
  • Traditional IRA contributions
  • The student loan interest deduction
  • The new tuition deduction
  • Reduction of allowable itemized deductions
  • The Earned Income Credit
  • Deductible medical expenses
  • Allowable miscellaneous itemized deductions
  • Passive rental loss deductions (the $25,000 exception)
  • Taxation of Social Security benefits

Phase-out amounts are not consistent and are different for each separate deduction and/or credit. If there is a deduction or credit that you hope to claim on your return this year, make sure you know if there is an AGI limitation. If you find that your AGI is greater than allowed, you still have time to reduce your AGI and keep it under the required amount.

Keep Watch on the Alternative Minimum Tax (AMT)

More and more folks are subjected to alternative minimum tax (AMT). This is a separate tax, which has different rules to calculate your AMT. You should compare your normal tax to your AMT, and your "alternative" is to pay the greater of the two. It's not a very good alternative, but it's one to be aware of since IRS computers can catch this often-overlooked tax.

A few of the scenarios that could subject you to the AMT are: a large number of personal exemptions; large amounts of state and local taxes paid; large amounts of miscellaneous itemized deductions; large deductible medical expenses; the bargain element of incentive stock options; and/or large capital gains.

Planning for the AMT is even tougher than normal taxes as each situation is unique. If you see yourself in the AMT field, make sure that you understand the impact it will have. Even if you can't do anything to reduce your AMT, you will at least know it's there and avoid any year-end moves that would make matters worse.

For more information and a free consultation to see if AMT affects you, please contact us.

Charitable Contributions

If you have appreciated stock that you've held for more than one year, you might consider keeping the cash and donating the stock. By doing this, you can avoid paying tax on the appreciation, and still be able to deduct the full value of the stock. You win, your charity wins, and the only loser is the IRS (but they made this tax break into a law). Another consideration is the donation of appreciated stock into a "donor-advised fund."

If you still favor the stock and want to maintain a position of shares after your charitable contribution, you can simply buy new shares in the company. Wash-sale rules are not in effect for shares that you sell for a gain or contribute to a charity. Your favorite charity will be more than happy to help you with stock donations, so feel free to contact them directly with questions. Don't wait until the last minute, as you'll need some time to make sure that all of the transfers take place the year you want for tax purposes.

Use your credit card

We are not advising running up debt, however, credit cards can be useful tools. Here's a way to make your credit card work for you. If you have deductible expenses (such as business expenses, medical expenses, miscellaneous itemized deductions, charitable contributions, etc.), you can use your credit card to make the purchase this year, take the deduction this year, and pay your credit card bill next year. When you pay with a credit card, the IRS considers the expense deductible in the year that the charge is incurred, not when you pay the credit card charge.

Of course, it's important that you pay off the credit card bill quickly enough so the interest you pay doesn't offset the benefit of the tax deduction. If you have the right credit card, you can receive a 30-day "float" that amounts to an interest-free use of the bank's money if you pay it off when the bill is due. You can also check into credit cards that offer benefits such as points awarded for purchases that are redeemable for air travel or other gifts. If you have to spend money why not get something back for it? As long as you pay the bill off in full before the due date to avoid finance charges, you will get a bonus for your hard earned dollars spent!

Prepay your state and/or local taxes

If you think that your tax bracket next year will be no higher than this year, and you won't be affected by any alternative minimum tax (AMT) issues, you might consider paying state and local taxes before the end of this year. If you owe money anyway, why not make payments before December 31 and take the federal tax deduction this year?

Some think that this strategy only applies to people who have fourth-quarter estimated tax payments to make in January, but that is not the case. If you are a W-2 wage earner and expect a state/local tax balance due, you can take advantage of a state/local prepayment voucher and make your tax payment before the end of the year. Before prepaying your taxes, make sure to review your alternative minimum tax position. If you find yourself in the AMT zone, prepaying your state taxes will not result in any additional deduction.

Also, make sure that you can itemize your deductions in the current year. If you can't itemize, then prepaying your state taxes will not be of benefit to you. Another consideration is to pay by credit card if possible. Many states now allow people to pay taxes using a credit card, which generates the deduction this year, but allows you to pay the credit card bill some time in the future. We also advise paying the credit card off before the end of the interest free grace period to avoid unnecessary fees that could offset the tax savings.